Has Alphabet Topped Out? (GOOGL, GOOG)

Alphabet Inc. (GOOGL) has rewarded institutional and retail shareholders for months, but its impressive uptrend may be coming to an end, replaced by an intermediate correction that could relinquish 200 or more points before committed buyers return in force. As a result, investors and market timers who have profited from this rally should tighten up stops, take profits or institute options plays to protect their hard-earned gains.

While the tech giant has delivered a broad assortment of innovations and initiatives in the past decade, search engine advertising revenues still comprise a much greater share of quarterly revenues than cloud computing, self-driving cars or artificial intelligence. That cyclical force could dampen profitability in coming quarters, given weaker-than-expected U.S. growth in the first half of 2017. This type of shortfall is typical late in an economic expansion, often presaging a recession lasting one or two years. (For more, see: The Business of Google.)

GOOGL Long-Term Chart (2004 – 2017)

The company came public at $50 in August 2004, after adjustment for the 2014 split that created two equity classes and a new corporate identity. It ground sideways for two weeks following its introduction and took off in a historic uptrend that continued into the first quarter of 2006, when it stalled at $237.55. The stock then eased into a broad trading range, ahead of a cycle-ending rally burst that ended at $373 in November 2007. (See also: Why Google Became Alphabet.)

The stock plunged in two broad waves during the 2008 economic collapse, coming to rest at a two-year low just above $120 in December. The subsequent recovery wave lagged other tech stocks, requiring nearly four years to complete a 100% round trip into the prior-decade's high. A 2013 breakout caught fire, lifting the stock in a stairstep pattern that featured quick rally bursts interspersed with long periods of sideways consolidation.

A 2015 breakout lost momentum in the first quarter of 2016, giving way to choppy sideways action, ahead of a 2017 breakout that mounted a four-year trendline of rising highs in April. The uptick then ran into a buzzsaw of selling pressure, declining to new support in a testing process that is still under way as we head toward the third quarter. This marks a binary setup in which new highs will continue the uptrend while a breakdown may signal the rally's end, ahead of a multi-month trading range or long-term top. (To learn more, check out: Identifying Tops and Topping Patterns With Surprising Accuracy.)

GOOGL Short-Term Chart (2015 – 2017)

A July 2015 gap ended more than a year of lagging performance, generating a two-step rally that topped out near $800 at the start of 2016. The stock stretched toward $840 in the second half of the year, grinding out a rising wedge pattern that finally broke to the upside in April 2017. That uptick also broke long-term resistance at the rising highs, reaching $1,000, where aggressive selling pressure triggered an intermediate reversal.

The quick downturn at the magic number raises the odds that the April rally signaled a climax event that will soon give way to a multi-month correction. However, bulls will retain control as long as the price holds above new support at the unfilled gap between $890 and $920. Sidelined players should avoid long and short positions between that level and the all-time high at $1,008 until one side takes control with a breakout or breakdown. (See also: The Anatomy of Trading Breakouts.)

On-balance volume (OBV) has faithfully tracked price action since 2014, also rising in stairstep increments. It reached a new high in May 2017, signaling bullish convergence that keeps bulls in charge, at least for now. However, the first leg of the downturn at $1,000 generated the highest selling volume since the fourth quarter of 2016, when the stock fell nearly 100 points in under four weeks.

The Bottom Line

Alphabet broke out above a multi-year rising trendline in April 2017, highlighting significant relative strength, ahead a rally burst just above $1,000. Aggressive sellers then triggered a sizable reversal, setting up a key test of the uptrend, with a decline through $890 signaling the start of a major correction or long-term market top. (For related reading, see: The Tech Bubble Will Burst: The Question Is When.)

<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>